FY26 Reporting Season: Winners, Warning Signs and What To Watch For

Hello and welcome to the InvestmentMarkets podcast, where we aim to discuss investment matters that impact self-directed investors. I'm your host Darren Connolly, CEO of Investment Markets, and today I'm delighted to be joined by Rachel Waterhouse, CEO of the Australian Shareholders Association. Today we're going to be discussing reporting season and matters around reporting season but before I get into it I need to remind you that this is all general advice and general information only and nothing in this podcast should be construed as an investment recommendation. You will need to decide what is right for you. Welcome Rachel.

Thank you.

Now, Rachel, we've just talking about it, but we're obviously through reporting season. We're out the other side. Lots of companies, lots of material, lots of information for the ASA to go through. What should individual shareholders be paying attention to?

Yeah, they should be paying attention to the message that's coming out. So has it changed? Is the focus of the organisation, you know, has that changed in a way that you're uncomfortable, but ultimately a lot of it is around the financials. So having a look at the debt level, looking at the cash, looking at the profit level, um as far as the the season that we've just had there were definitely one third I think it was were disappointments uh and then there was those that are achieving and those that have exceeded the expectation so it's a good opportunity just reflecting on what happened to to watch listen to the companies you own but also just to be careful of being too involved because an investment is a long term decision that you make. And there's a lot of ups and downs there.

So the people get caught up in the headlines? Is that a risk?

It is. It is a risk to get caught up in the headlines. So you need to be looking at it factually. There's more volatility than there ever has been when results come out. And that's what a lot of shareholders mentioned that that volatility. So it comes often down to your confidence in the performance, thinking through Have they met the expectations? What's changed? What's changed with the story and whether you're comfortable with it?

And in your experience, is it usually the change in the story that's potentially a red flag to have a look at?

Definitely a change in the story is a red flag. So, you know, there's there's an example that I'm thinking of where a company has been communicating in a certain way around what they're going to achieve. And then that story has changed. And, you know, there's a lot of technology available to an investor these days. And there's the opportunity to also use AI when you're analysing and trying to decide, does that company fit my thesis that I have in my financial plan around why I have it in my portfolio?

We might come on to AI in a minute. It is everywhere, obviously, in the headlines. But the ASX itself, looking at it as an index, I think the return was it had a two in front of it. adding in obviously dividends, it was just shy of 6%. So maybe not as bad as some people might have feared, certainly below long-term averages and less than some of the other exchanges and indexes we see overseas. So the question sort of comes to mind is, is Australia X growth Are we in a cyclical downturn? Are we in strife? What's going on?

Yeah, it's really interesting because a lot of people were disappointed as far as looking at that year and where we ended up. And if there weren't dividends, you wouldn't have got to that nearly six percent. The challenge here is as an investor, really just thinking through where you're invested and diversification, because you could potentially look to another market and think, better returns, I should have all my money in this other country. But things can happen anywhere. And we are more exposed here to financial services and mining. So the mix of companies also adds to that. So I guess, you know, is growth a potential as investors? They hope so. Yeah, disappointing, but looking forward, and it all depends on what you're invested in. Some companies perform extremely well, and if you had a portfolio tilted to higher performing companies, maybe you didn't have the average 6%. So if you look to the US, there's a lot of technology companies there. They don't provide dividends. So I think diversification is super important, a bit disappointing, could have been worse, hoping for better results.

And we saw, speaking of the US, we saw an interesting development whereby SpaceX was made available to investors and it's obviously got now some Australian shareholders and there was a prospectus that went out. That, if I may say, got waved through very quickly and had a number of statements in it that certainly were eye-raising, if I can put it that way. Is that something the ASA is keen to see more of or is a little bit wary of? What's your position on that?

As far as ASA and our members, they're interested in opportunities and we try to be careful around our views on particular companies. But picking up SpaceX, we have been asked about that. And what we did say to investors at the time is to really understand the organisation, understand if it's profitable or which parts of that business were profitable. And from memory, one part of the business was profitable. So often that comes down to your confidence in the long term strategy. and whether you want to be in it. So often IPOs have a lot of interest and expectation. They don't always deliver in the short term, but it comes down to the individual. And even that prospectus that was largely a lot of commentary around was pictures of rockets everywhere. It was a beautiful prospectus.

I think there was data centers on the moon. Is that where it worked?

Absolutely beautiful. But you really need to think as an investor, do I want to invest in these? What are the returns? How confident am I? And then take full responsibility for that decision. But often it is around the diversification of the companies that you're involved in.

So is the ASA generally supportive of those type of opportunities being presented to Australian investors?

Yeah, I think that's really important. The Australian investors have opportunities outside here and, you know, it is an opportunity and it is a decision. And yeah, the more IPOs and more access is good for investors. And then they obviously need to do their diligence and research.

Everybody's going to take responsibility for their own decisions and their own investments. Now through reporting season, obviously you have company monitors. I assume they were very busy as well during August. What really stood out? What themes or issues did they bring back to you and your members from all of the time they spent at the meetings and going through all of the information?

So the monitors, it's a year long job as far as looking at companies and reporting season is a point in time at looking at the results. It's a good opportunity to get across them again, see their expectations, has an organisation delivered or not, which largely leads then into the AGM season itself. So reporting season, yes. attend the briefings, ask questions if you can. We always advocate that shareholders and company monitors can attend them and then take away how is it performing, which then leads to AGM season asking a lot of questions around governance, around performance and directly with the companies at that point in time.

sounds like a always on type role.

It is an always on and they are amazing as far as these are volunteers that are looking out for other investors and asking the right questions on their behalf.

And is there any particular themes that came out of sort of the last month that you would like to flag or you are flagging to the ASA members?

Yeah, often it's that we want to see forecasts. There's some companies that aren't confident to give a forecast with their results. So we sometimes see that. We also have issues around that we look to. One of those is AI. So a lot of organisations, they pop AI in the presentation, they're talking all about it. As an organisation we're looking at, are there directors experienced? Can they look out for AI and cyber risk? So even though it's not directly related to the result itself, it's digging deeper and that's what we're looking at. Do they have the right skills to make sure that all of that AI is quantified?

So there's some actual sustenance to the messages and the brochures?

Absolutely. And then there are other topics that have been in the past where you'll see a certain word that's involved in in reporting seasons. So, yeah, it's all around substance.

OK, that makes sense. Now, you alluded to the fact that companies, maybe about a third didn't meet expectations, maybe a third exceeded and there was more sort of in the middle. It seems to be the companies who don't meet expectations are being penalized quite heavily. Maybe they've always been penalized, but the perception I think is that the level of penalization is getting sort of larger and larger. Is that something that you've noticed?

Definitely something that we've noticed as far as that volatility on the day can be a huge difference, whether, you know, that's 5% or 10% drop in share price can happen just related to the announcement.

And is that, in part, do you think that's linked back to your comment around forecasting? are not willing to be sort of caught out by the market when you don't deliver on something you might've said previously?

Yeah, I think so. I think it's, it's always, it's around the sentiment on the day and how people feel and it can really change within a day. Sometimes they bounce right back up. So it's a good assessment of sentiment. It's not always directly related to the detail. It's how they're feeling. It's a, there's a lot of algorithms, there's a lot of going through, have things changed? And I guess it's just that, that confidence side, And investors investing for the long term should really be thinking not just about the day, could be a buying opportunity if they believe that it's going to bounce back up, but really thinking about long term. So yeah, I think that's an issue for companies at the moment. And they should really be thinking about how they're communicating with the market throughout the entire year. So bad news is not, you know, it's kind of spoken about beforehand where it can be.

Yeah, so there's maybe there's sort of more onerous communication or disclosure opportunities to try and smooth the path out a little bit on companies. Is that fair?

I would say that's fair because you don't want to surprise investors, whether they're individuals like us or their organisations investing really don't want surprises.

And how does the sort of the algorithmic trading and AI, all of that play into that because the anecdotal commentary is there's less market movers. It's all driven by machines. I know people are now using AI to read the sentiment of releases. That makes it extremely difficult for companies to actually manage expectations, surely.

Yeah, and I don't understand all of the interests of how this necessarily works, but definitely AI is being used by investors, being used by the big ones, individuals as well, looking for what has changed. Are they confident? I'm aware that companies are also screening their communications before they go out to what would an investor think with this communication?

As long as they're not writing it with AI.

Yeah, well, who knows? Probably. But I think the opportunity for investors is I know that can impact the market. But as an individual, you've got yourself, you're responsible for making decisions. But you do have great AI tools out there that maybe find things that you can't see.

So, for self-directed investors, there's maybe an opportunity whereby this type of analysis and insight is becoming more democratized through the technology. And the investors themselves are actually able to get hold of these tools.

They absolutely are using them. They are using them to screen, to look for red flags, look for differences in communication.

They would be telling you all of this, all of your members.

Yes, they are. They are. So I've been to many member meetings where we talk about this and people share their models. They explain how they're using AI to screen. I've heard a lot of examples of this. I think it's going to become more commonplace. And a lot of people think technology is all about the younger age group, but it's not. There's many members that are using multiple AI tools to help them with their investing and do the research side. You have to make your own decision.

Yep. We alluded to sort of the dividend side of the Australian market in particular. And it's very, very important for self-directed investors and retirees. obviously looking for that income to support lifestyle, their lifestyle in retirement. What did this year in particular tell us about the importance of dividends?

Yeah, I think it tells you that they are important in a collective portfolio as far as your percentage return. There's also tax changes coming where, you know, you think about your dividends as well and how income is distributed. investors are mixed. You know, you have those that are really after the dividends, those are after growth. So it all comes down to your mix of companies that you own. But if you look at the ASX 200, the dividends made 50% of your potential return.

That's a very large component. And as you said, in the US, it's zero, nearly, or mostly. Do you think that's actually an issue for Australia? That maybe with some of the tax changes that have been announced, and we'll not go into that. But for some of those changes, it's going to actually push Australia further down that dividend and distribution path to its detriment.

Yeah, I do. I do think so. There's going to be, based on just the conversations that we've had in hearing from investors, they're going to be more focused on the dividends rather than the growth side potentially going forward. The benefit of Australia is you also have ranking credits. So you've got your ranking credits and you've got your dividends. And then the US market, you've mostly got growth. So it comes down to your own needs, your own income requirement, whether you're buying or selling or holding to how much, you know, what you do there.

And I guess access to those opportunities overseas has never been easier.

Yeah, that's, I mean, investing in general is really, really easy. Everyone can do it. International markets here, many, many opportunities.

And nearly sometimes The wealth of opportunities nearly creates its own issue, right? You have too many in front of you, sometimes there is paralysis. But I guess that's the role of some of the AI tools, is to help go through that.

Yeah, and they can look at things. The AI tools can really figure out your diversification and if you've got a risk or if you've got ETFs, if you've got multiple ETFs with the same companies sitting in them. So there's the opportunity there and you are right. There's so many things you can invest in. It's making the right decisions for you.

Now, every season we have companies that have their statutory reports, statutory numbers, and their underlying numbers. Sometimes they don't meet, and sometimes there are legitimate reasons for that. Sometimes the reasons might be more questionable. How big of an issue is this in Australia right now and what should individual shareholders be doing or thinking about when it comes to one of their investments that has gone down this path that has large adjustments into its accounts?

Yeah, they should. This is where education is really important and even terminology for those new investors. You should look at the statutory side, start there first, then look at the underlying profit. And that's really what management wants to say to you. And there could be one offs as far as adjustments that have been made. So you really need to understand the financials there. A lot of investors often comment in our member meetings around the importance of looking at cash as well. the cash inflows and outflows, to give you a real picture of how a company is performing. So a lot of investors do focus on cash and they focus on debt.

Kurt Fearnley Cash is king. Georgie Tunny Yeah, it is king. Kurt Fearnley And debt will kill you.

Georgie Tunny Yes. And they're really, really important. So it all comes down to the logic of what the company is saying and, you know, what you think the impact is. And you don't want to be having this all the time. You really, if there is a one off, you need to know what it is, why it happened and have a good understanding not that their accounts are just looking better.

Yeah and I guess the continual adjustments would be something that you would all you would be on the lookout for.

Absolutely and even just then when we're looking at AGM season that's one of the things that we're looking at when we look through the financials for a full year.

Okay. And AGM season is, it's going to be upon us pretty quickly, so another busy part of the year for the ASA. So in addition to the changes in the numbers, what are the two or three other things that the ASA is really focused on for AGM season?

We're really focused on CEO remuneration. Is that fair and is it incentivising the company to provide long-term results for shareholders? That's one of the things. We're looking at the director's skill set. Do they have the right skills on the board and are they able to manage risks such as cyber and AI effectively? Do they have technology experts on the board. Those are the things that we're looking at. And the delivery of AGMs is important for shareholders. They want a hybrid AGM, so they want to be able to go online or be in person. That's the focus. We look at 150 companies throughout the whole year. And we turn up and ask questions. And that's all to do with our amazing members and volunteers that are turning up to represent the I think the 7.7 million retail shareholders in Australia. So it's an important role.

It's one way to hold management to account for the investments for the owners, for the owners of the company, because how else would it happen? That's right.

That's important. And it's important for companies to remember that, too. It's not putting on a show for the investors. It's you have your owners there and it's an opportunity for them to ask questions. It's an opportunity for the board and management to to relate, to talk, get to know each other and understand concerns.

And of those three things that you outlined, is there one in particular that's sort of really come to the fore that you think in general across those 150 companies, we could do a lot better?

Yeah, I'm probably sitting on the fence here. CEO pay, definitely, and how CEOs are rewarded. And then in that director space, it's not just their skills, but their workload. There's a lot of chairs that we think are on too many boards and maybe don't have the time if something goes wrong. So those would be the two things because we don't want to see CEOs getting a sign on payment or payment for leaving, we want them to be showing performance. And really that is COP we look at, but it's really then the executive team, how that flows down.

And have we, and we sort of in the Australian terms, have we been getting better at that or has it been sliding a little bit? Has best practice been nullified a little bit?

I think we're getting better. But the challenge is it's very disappointing when you're an owner of a company, a shareholder, and you see the CEO being remunerated, but the company not performing. So that's where it becomes a real issue. And different countries do remuneration in different ways. So we look for a split in how they're paid between cash and shares and delivery of those equities over time in the short term and the long term. And when things go wrong, we want a company to be able to claw back some of that pay.

And maybe just not reset the benchmark to to a new low.

Yeah. And I mean, on the flip side, that's talking about, you know, when things go wrong. It's really important that CEOs do have an important role to play in companies and they should be rewarded effectively. So sometimes there are examples of CEOs that maybe aren't getting paid like they should. And I heard an example this week where one of the volunteers benchmarked and thought the CEO pay was was too low, which is a bit unusual, but they did raise that.

I haven't heard of that before where somebody said a CEO is being paid too little.

No, it's usually the other way around, but it was an interesting example. But usually it's around, are they getting paid? Is there performance there? Is there enough performance?

Is there a view on director remuneration as well?

There is a view at the highest level, but that's where we're doing some more work. We're looking at our voting and engagement guidelines and may have a stronger view on that. At the moment, we'll look at a director pool when they ask for an increase and we'll assess it at that point in time. But we would like to have more views around director pay and also then, you know, for directors on certain committees, what's that total pay? At the moment, mostly CEO focus and then the call of directors.

And potentially whether or not the directors actually have some skin.

in the game, so to speak. Yeah, that is one of the key things that we look at is skin in the game and questioning when they don't have skin in the game. And there are many examples of that where I've gone to the AGM and represented our members where new directors or someone that's been there a year or two haven't bought shares or haven't bought the level of shares that we expect. We we want them to feel the same as us, like focus in on the company performing and then you will benefit. And if it doesn't perform, then, you know, there's a consequence.

Well they then just become an owner like everybody else and maybe potentially you could convince them to be an ASA member.

Oh yes definitely.

Well that's lovely insights today Rachel. Thank you very much for all of that. Thank you also to everyone for listening or watching. I encourage you to follow or share on the channel of your choice as it makes a huge difference to helping people find us. I should point out the ASA's Queensland Investor Summit is coming up soon. All the details are on the ASA's website. Please visit and have a look. And remember to search, find and compare hundreds of investment products all into one place for free. Go to investmentmarkets.com.au. Thank you.